SMARTPHONES: HTC Ties Up With Google, Or Does It?

Bottom line: Google's purchase of HTC's Pixel
assets is a sign of no confidence in HTC's chances of longer-term
survival as an independent smartphone maker.

Google's HTC purchase: reason for optimism or pessimism

Everyone is giving their two cents about the big new tie-up between
Taiwan smartphone maker HTC (Taipei: 2498)
and Google(Nasdaq: GOOG), so I figured
I'd weigh in as well on this deal that has quite a few threads.
From where I sit, the deal marks the latest distress sign coming
from an overcrowded smartphone field here in China, even though HTC
is technically based in Taiwan.

Equally or even more interesting is the question of whether Google
is a white knight riding to HTC's rescue, or rather trying to
protect its own interests from what it sees as a fast-sinking ship.
I tend to think the case might be the latter, which I'll explain
shortly, even though both Google and HTC would probably vehemently
deny such a conclusion.

The bottom line is that HTC is a badly hurting company, but at the
same time is also Google's main partner for the relaunch of the
Internet giant's poorly performing smartphone line. I was aware
that HTC was in trouble for a while, but a graphic I put together
shortly after the announcement really drove home that message.
(English article)

That shows that HTC's share of the global smartphone market has
nosedived from a sizable 4.4 percent in 2012 to just 0.5 percent in
the first half of this year. At the same time, revenue has
plummeted in lockstep, on track to hit about T$60 billion ($2
billion) this year -- about one-eighth of what it was just back in
2011 at the height of its rise.

All that said, let's review the big picture in the news, which has
Google essentially buying a major chunk of HTC for $1.1 billion.
That chunk is the part of HTC that is helping Google to develop its
own Pixel line of smartphones. Google watchers will know the
company has tried hard to get into the smartphone hardware
business, starting with its roll-out of Nexus phones back in 2010.
The logic is pretty simple, namely that Google wants to try and get
some more direct benefits from its hugely popular Android
smartphone operating system, which it can only really do if it
builds its own phones using that system.

But despite Google's best efforts, Nexus never really went
anywhere, and now the company is trying again with Pixel, seeking
to use position the brand as a higher-end product that can compete
with Apple(Nasdaq: AAPL)
and Huawei. Google has always worked with
third-party contract manufacturers to make its phones in the past,
and was working with HTC for its first Pixel models.

Half Empty or Half Full?

Thus this purchase of HTC's Pixel team can be seen in one of two
ways. The more positive is that Google wants to give its struggling
manufacturing partner some cash to help HTC turn itself around and
return to its previous global prominence. The more negative view is
that Google may be worrying about HTC's longer term viability, and
thus wants to salvage the Pixel team while it still has time.

As I've said above, I would tend to side with the latter view.
HTC's current market value sits at just $1.8 billion, meaning
Google's $1.1 billion cash injection is worth nearly two-thirds of
the company's total value. That means there's really not much left
to the company, at least as far as investors are concerned, once
the Pixel assets are stripped out.

I honestly haven't followed HTC's product line too closely these
days, partly because it's quite difficult to find any of their
phones around anymore. Put presumably they aren't doing anything
too revolutionary, or if they are they're doing a poor job of
getting out the message. Thus it could only be a matter of time
before the company is forced to sell itself, which has been rumored
before, or perhaps evens shut down completely.

In that light, Google's move is really quite self-serving, though
it's far from clear whether it's a good move. The Internet giant
had pretty disastrous results with its only other smartphone
purchase of Motorola a while back, and it does
seem this is a company that doesn't have a very strong record with
hardware. But at the end of the day Google is so wealthy it can
afford to make a few bad multibillion-dollar moves. HTC is quite a
different story, and I do expect it will get sold or leave the
smartphone space soon, even if this $1.1 billion lifeline does
extend its life a little longer.